Controlling Risk

Controlling risk is one of the most important ingredients of successful trading. While it is emotionally more appealing to focus on the upside of trading, every trader should know precisely how much he or she is willing to lose on each trade before cutting losses, and how much he or she is willing to lose in trading account before ceasing trading and re-evaluating.

Risk will essentially be controlled in two ways: by exiting losing trades before losses exceed your pre-determined maximum tolerance (or "cutting losses"), and by limiting the "leverage" or position size you trade for a given account size.

Cutting Losses

Too often, the beginning trader will be overly concerned about incurring losing trades. Trader therefore lets losses mount, with the "hope" that the market will turn around and the loss will turn into a gain.

Almost all successful trading strategies include a disciplined procedure for cutting losses. When a trader is down on a position, many emotions often come into play, making it difficult to cut losses at the right level. The best practice is to decide where losses will be cut before a trade is even initiated. This will assure the trader of the maximum amount he or she can expect to lose on the trade.

The other key element of risk control is overall account risk. In other words, a trader should know before start of trading endeavor how much of trading account he or she is willing to lose before ceasing trading and re-evaluating strategy. If you open an account with $2,000, are you willing to lose all $2,000? $1,000? As with risk control on individual trades, the most important discipline is to decide on a level and stick with it. Further information on the mechanics of limiting risk can be found in trading literature.

Trading of financial instruments involves substantial risks, including complete possible loss of principal plus other losses and is not suitable for all members of the public. You should make an independent judgment as to whether trading is appropriate for you in light of your financial condition, investment experience, risk tolerance, and other relevant factors. We have taken reasonable measures to ensure accuracy of the content on this web site, however, we do not guarantee its accuracy, and will not accept liability for any damage, losses or lost profits which may arise directly or indirectly from the content or your inability to access this web site, for any delay in or failure of the transmission or the receipt of any instruction or notifications sent through this web site. The content on this web site is subject to change at any time without notice. Not all services are available in all areas.